Tuesday, 29 April 2014

A Review of Austerity: The History of a Dangerous Idea, by Mark Blyth, part one

If there was
an award for the dumbest yet most bizarrely effective political idea of recent
years, one candidate would be an absolute shoo-in. The notion that debt racked up by the last Labour government in the UK caused the financial crisis, doesn’t seem to suffer in the
least from endless repetition, despite being economically infantile. Expect it
to play a possibly decisive role in the General Election campaign early next
year.

As Mark Blyth
observes in his book, Austerity: The History of a Dangerous Idea, this stems from “a wonderful confusion of
cause and effect”. The state gets the blame for a “quintessentially
private-sector crisis”. In the UK and US, privately funded housing bubbles
imploded, rendering insolvent hugely leveraged (indebted) financial
institutions. In Europe even more vastly leveraged banks (in 2008 Deutsche Bank
had assets that were 80% of German GDP) were left high and dry by either, as in
case of Ireland and Spain, the bursting of a similar house price bubble, or, as
with Italy and Portugal, too much lending to governments that suddenly went
sour.

“The fiscal
crisis in all these countries,” writes Blyth in a statement of the obvious that
shouldn’t be, but evidently is, painfully necessary, “was the consequence of the financial crisis
washing up on their shores, not its cause.”

But that is
not the way our politics has been able to rationalise what happened. “What
were essentially private-sector debt problems were rechristened as ‘the Debt’
generated by ‘out of control’ public spending,” says Blyth. Cue homilies about
the penance we all have pay for partying like there was no tomorrow in the boom
years. And that penance takes the form of huge public spending cuts –
austerity, “a deserved doomsday for the borrowing way of life”

Here is Mark
Blyth (a Scottish professor at an American university) speaking:

But I think Blyth is so concerned to nail the patent deceit and injustice of this
subterfuge that he neglects one thing. We don’t actually have austerity. We
have public sector austerity in spades, sure. Disabled people in Britain, who
clearly spent the years prior to 2007 downing endless bottles of Moёt, are paying
a wholly justified penance through the withdrawal of the Independent Living
Fund, the Bedroom tax, the work capability scandal, the limiting of
contribution-based Employment and Support Allowance to one year and the
abolition of the disabled worker element of Working Tax Credit.

But private
sector austerity, a penance for the sector of society that actually caused the
problems in the first place? I must have missed that one. After the taxpayer
funded bail-out that caused the debt to mount initially (£1.5 trillion in
Britain and $7.7 trillion in the US), the private sector has been suitably chastised
by successive bouts of Quantitative Easing, a subsidy to banks and other
financial institutions that has amounted to £357 billion in Britain, all under
the watchful eye a government run by the austerity evangelising Conservatives.
Banks in the UK have also had to deal with the crushing blow of the £80 billion Funding for Lending programme,
and a state guarantee of 15% of the value of mortgage loans made under the Help
to Buy Scheme. All this has taken place in the context of near zero interest
rates which makes borrowing money incredibly cheap and saving it kind of
pointless. And the tough medicine has been topped off with a cut of corporate
income tax from 28% to 20% (by 2015). I really don’t know how they cope.

It’s not as
if you can say that debt isn’t a problem for the private sector and it is for
the public sector. As Blyth says, we are dealing with “weaknesses internal to
the private sector” and weaknesses that was transferred to the state’s books. According
to a report by the consultants McKinsey in 2011, overall debt in the UK was 507% of GDP, making Britain the
second most indebted country in the world, behind Japan. Government debt (and
this is post-bailout remember) was the smallest component, at 81%. The debt of
financial institutions made up a huge 219%, non-financial institutions 109% and
households 98%. Overall debt is now down to 484% of GDP but it’s still
enormous.

In November
2013, household debt in the UK reached a record level of £1.43 trillion.

But when
confronted with a two decades-long bout of financial incontinence by the
private sector, governments in the UK, US and Europe, in contrast to the
unbending sternness with which they have imposed public sector austerity, have
responded by … prescribing laxatives.

They
certainly don’t make austerity like they used to in the old days. One of the
attributes of Blyth’s book is that he delves into the intellectual antecedents
of austerity, as well as critiquing its contemporary application. And here you
get a rather different kind of austerity. Adam Smith, the father of market
economics, was against “easy money” and thought merchants, unlike governments,
were by nature savers. Early nineteenth century economist David Ricardo was
adamant that states shouldn’t “cushion market adjustments.” Into the 20th
century and the ultra-free market Austrian school believed austerity meant “a
flight into real values”. “The thing to do” wrote Austrian free marketeer
Ludwig von Mises, “is to curtail consumption … the economy must adapt itself to
these losses”. Another “austerity enabler”, late twentieth century right-wing
economist, Milton Friedman, believed in controlling the money supply.

According to
Blyth, Austrians like Von Mises and Friedrich Von Hayek (Margaret Thatcher’s
favourite economist) thought that “the very worst thing that can happen is for
the government to get involved. By flooding the market with liquidity, keeping
the rate of interest low when credit is scarce, or attempting to stimulate the
economy to smooth out the cycle, government intervention simply prolongs the
recession”.

This is
practically an instruction sheet of how our austerity-preaching governments have reacted. First of all they “got
involved” from the outset through massive bail-outs of banks in the US, UK and
also Europe (the difference with the European Central Bank is that they haven’t
taken on toxic bank assets but there have been huge bail outs in Ireland and
Spain and the ongoing suffering inflicted on Greece is to ensure that French
and German banks never have to face up to their bad debts).

Next we have
the mistake of “flooding the market with liquidity” which is the definition of
Quantitative Easing, practiced by austerian Conservatives in Britain as well as
the austerity-sceptics of the Obama administration. And the unwavering,
government-toppling autocrats of the European Central Bank are not averse to a
spot of Quantitative Easing, either. The Long-term Refinancing Operation
undertaken for still massively indebted banks in 2011 and 2012 was, in Blyth’s
words, “an unorthodox policy of quasi-quantitative easing.” Then there is
keeping the rate of interest low when credit is scarce (like after a credit
crunch). British interest rates are stuck at 0.25% and there is paranoia about
what will ensue if they are raised. European, ECB, interest rates are also at a record low of 0.25%. The last thing any government wants to do is “curtail
consumption” even if it is rooted, as the value of real wages fall, in
borrowing. And as for Milton Friedman and controlling the money supply, as
David Coleman once said, “if he were alive today, he’d been turning in his
grave.”

In the
real-world austerity experiments of the 1920 and ‘30s, we find governments not
only slashed what public spending there was but also let busts run their
natural course, an eventuality our governments desperately stopped from
happening. The ‘liquidationist’ doctrine of the US government of the early ‘30s
turned the Wall Street Crash and a series of bank failures from a “relatively
minor budget deficit into a full-blown financial crisis and depression,” writes
Blyth. Both the US and Britain aggressively raised
interest rates, rather than sinking them to below the rate of inflation as
current policy dictates. Japan’s civilian government of the early ‘30s, we
read, raised interest rates into the teeth of the depression, paving the way
for a Fascist military takeover that radically reversed course. In all cases,
austerity was applied with the same vigour to the private sector, as the
public.

Marxian economist Andrew Kliman has pointed out that the destruction engendered by the
laissez-faire approach of the 1930s was far greater than governments had
expected and led to momentous changes such as World War Two. “Policymakers have
not wanted this to happen again, so now they intervene with monetary and fiscal
policies in order to prevent the full-scale destruction of capital value,” he
writes in his book, The Failure of
Capitalist Production. “This explains why subsequent downturns have not
been nearly as severe as the Depression.”

It also
explains the special kind of austerity we have, which is only applied to the
public sector. The private sector is treated with the utmost permissiveness and
government intervention.

In the second part of this review, I want to discuss how Keynesianism, which Blyth says
returned for a brief twelve month reunion tour, in fact never went away. And
how Blyth’s conclusion – that we should, in retrospect, have let the banks fail
– is a version of liquidationism the Left should embrace.

About Me

Capitalism is not beautiful, said John Maynard Keynes. It is not intelligent, it is not virtuous and it not just. “But when we wonder what to put in its place, we are extremely perplexed.”
This blog is about the ideologies that mask the ugliness and injustice beneath the surface. And how our perplexity might be diminished.
You can contact me at idealogically@gmail.com